Better Together: Using Syndication to Grow Your Multifamily PortfolioPaul Winterowd
Syndicating Deals Is the Next Step to Achieving Your Investment Goals
As the multifamily market continues to grow, you may be wondering how newer multifamily investors are able to complete large transactions or add big commercial properties to their portfolios. If your investment goals are at Point A and you want to get to Point B quickly, the answer is right in front of you.
Multifamily syndicated deals are the oil in the multifamily gears allowing deals to move forward and real estate portfolios to grow, despite individual deficiencies. As multifamily investor Vinney Chopra put it in the Rental Housing Journal, “Real estate is the only investment where you can borrow other people’s money to purchase and control income-producing property.”
Since commercial real estate has existed, there has been syndicated deal structures to make these transactions happen. Deal syndication is a common way to make multifamily investments come together for sponsors and investors.
In a multifamily syndicated deal, sponsors find the property, evaluate that property’s viability, and raise funds. Investors add financial strength to the deal.
Syndicated deals allow individual sponsors to invest in properties that they otherwise could not be a part of. As a new or experienced player in the multifamily game, syndication is a great way to propel you forward, while building your portfolio. With that said, it’s important to understand what your debt will look like as you raise equity for your syndicated deal.
Loan Considerations for Syndicated Deals
Managing risk and liability is a guiding principle in the world of commercial and multifamily investing. Having a full understanding of how much skin you have in the game helps you make smart investments that allow you to build an increasingly strong personal financial statement (PFS)—which eventually will lead to sustainable wealth and financial freedom.
As a player in a syndicated deal, it’s essential to know whether the debt associated with that loan is recourse or non-recourse.
Recourse loans require a full personal guarantee that makes the sponsor directly at risk if the deal goes south and the property is foreclosed upon. Some investors refuse to participate in deals with recourse debt because they don’t want to take on the potential risk.
Non-recourse loans are the most common and the preferred structure in syndicated deals. This means the sponsors—and certainly not the investors—are personally liable for the amount borrowed. A non-recourse loan insulates everyone’s personal assets, shielding them from downside risk.
Only using non-recourse debt in your syndications is perceived as the standard for sophisticated investors. These ideal loan packages are more easily qualified for with a sturdy personal financial statement and real estate resume. Your PFS and real estate resume build off of each other—the stronger they are, the easier it is to qualify for larger multifamily deals, thus bringing a greater reward.
Qualifying for the Loan You Want for Your Syndication
Qualifying for the syndicated loan you want can be possible as the sole sponsor, or with multiple sponsors. Sponsors, also called syndicators, who don’t meet the credit standards can bring in additional co-sponsors in order to meet the criteria.
You should know the credit standards required for the financing you seek and have your potential co-sponsor(s) arranged before you apply for the loan. The credit standards for net worth and liquidity are underwritten as a combination of the sponsors’ assets.
Common credit standards to qualify for a non-recourse multifamily loan are:
- A net worth equal to the loan amount
- Liquid assets of 7–10% after the down payment
- A credit score of 650 or higher
The investment experience of the sponsors is also part of the approval equation. Spending time developing your real estate resume is important in order to best showcase your experience. If you don’t have a convincing resume or the experience necessary, get creative and get involved. Real estate pro, Joe Fairless, suggests engaging in property management as a way to get your foot in the multifamily door if you lack significant experience.
A Syndicated Deal Is Within Your Reach
While it can true that “if you build it, they will come,” it is best to line up your equity investors in advance of finding your deal. Before sourcing the deal, have a clear idea of who your investors will be and what types of deal they will have an interest in.
You should also have a clear picture of the amount of funding your ideal investors have ear-marked for the type of multifamily deal you want to make. The ideal sequencing is to have a term sheet for your loan before reaching out to investors so you’ll know the exact amount you’ll need to raise. A good rule of thumb is to plan on raising 25% of the purchase price for the loan down-payment, plus any rehab and reserves necessary for the project.
Most lenders want anyone with significant ownership involved in a syndicated deal to be on the loan. Typically, anyone with more than 20% ownership in a property will be required to sign on or guarantee the loan. Because of this, it is best to limit any one investor to less than 20% ownership of any one deal.
Syndicating deals is an accessible and achievable way to build wealth and make your investment goals a reality. Being aware of what to expect in approaching a syndicated multifamily deal, as well as navigating some of the nuances highlighted above, will help you successfully close on your next multifamily investment property.
As we’ve tried to point out, the debt financing aspect of the syndication is a crucial element. It is wise to start the process early and work with a lender that is familiar with the syndication process. Preparing all your financings and developing that relationship with a good lender will make the syndication process much less stressful and much more enjoyable.